Rise In Real Interest Rates Research Articles

A Structural Investigation of Quantitative Easing

Abstract Using nonlinear Bayesian methods that fully account for the binding zero lower bound (ZLB), we estimate a large-scale macrofinance DSGE model on U.S. data. Counterfactual analysis suggests that by easing financing conditions, quantitative easing facilitated a net increase in aggregate investment. The resulting expansion of firms’ production capacities lowered their marginal costs. These disinflationary supply side effects dominated over the inflationary effects induced by the stimulus to aggregate demand. At the ZLB, the concomitant rise in real interest rates, in turn, induced a net fall in aggregate consumption.

Public Debt Levels and Real Interest Rates: Causal Evidence from Parliamentary Elections

We use close elections in parliamentary democracies as natural experiments to estimate public debt levels’ effects on real interest rates. We first estimate that an election in which no party achieves a parliamentary majority causes the debt-to-GDP ratio to increase by 21 percentage points over the following five years relative to an election in which one party barely secures a majority. We next estimate that real interest rates rise by a relative 119 basis points following such an election, implying that a one percentage point increase in the debt-to-GDP ratio causes a 5.6 basis point increase in real rates. That effect is larger than most previous estimates in the literature, suggesting the potential importance of simultaneity in the determination of real rates and government debt levels.

Positive Correlation between Government Expenditure and Real Interest Rate: Testing Ramsey Model Based on American and Chinese Data

In the classical Ramsey Model, temporary increase of government expenditure will raise real interest rate. By using the data of American expenditure on national defense and the interest rate of 10-year constant maturities from 1959 to 2002, the paper points to the conclusion from the empirical analysis of positive correlation between government expenditure and real interest rate that temporary increase of government expenditure will surely lead to a rise in real interest rate.

Parasal Aktarım Mekanizması: Firma Bilanço Kanalı ve Türkiye

According to the firm balance-sheet channel of monetary transmission mechanism, since external finance is costly than internal finance, financially constrained firms chose internal finance. Monetary and fiscal authorities should consider the existence of the firm balance-sheet channel, when they design policies if it operates. A rise in real interest rates causes a rise in firm’s debt, fall in net worth and as a result of these changes, a rise in the marginal cost of external financing occurs. Consequently firms’ ability for investing and job creation decreases. In an economy in which investment is positively related with cash flow, an increase in firm’s cash flow results with an inrease in firm’s investment. In this paper we examined the effect of real interest rate, real exchange rate, cash flow and sales on the investment behaviour of the firm. The panel data analysis, performed by using Central Bank of Turkey’s firm balance sheet database, shows that the firm balance-sheet channel operates in Turkey.

Debt Deleveraging and the Zero Bound: Potentially Perverse Effects of Real Exchange Rate Movements

We present a microfounded two-country model of global imbalances and debt deleveraging. A sustained rise in saving in one country can lead to a worldwide fall in interest rates and an accumulation of debt in the other country. When a subsequent deleveraging shock occurs, interest rates are forced down further. In the presence of a zero bound to interest rates, the deleveraging country may face a combination of a large fall in output, deflation, a rise in real interest rates and real exchange rate appreciation. Such exchange rate appreciation will intensify the loss in output, magnify the deflation and further tighten the deleveraging constraint.

Coping with the recent financial crisis: Did inflation targeting make any difference?

The effects of the 2008/2009 financial crisis went largely among financial markets and hit the real economy, generating one of the greatest global economic shocks. The purpose of this study is to investigate whether inflation targeting has made a difference during this crisis. First, we put forward some arguments suggesting that inflation targeters can be expected to perform better when facing a global shock. Applying difference in difference in the spirit of Ball and Sheridan (2005), we assess the difference between targeters and non-targeters and find that there is no significant difference as regards inflation rate and GDP growth. However, the rise in real interest rate and inflation volatility during the crisis has been significantly less pronounced for targeters.

Coping with the Recent Financial Crisis, Did Inflation Targeting Make Any Difference?

The effects of the 2008/2009 financial crisis went largely among financial markets and hit the real economy, generating one of the greatest global economic shocks. The purpose of this study is to investigate whether inflation targeting has made a difference during this crisis. First, we put forward some arguments suggesting that inflation targeters can be expected to perform better when facing a global shock. Applying difference in difference in the spirit of Ball and Sheridan (2005), we assess the difference between targeters and non-targeters and find that there is no significant difference as regard inflation rate and GDP growth. However, the rise in real interest rate and inflation volatility during the crisis has been significantly less pronounced for targeters.

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Sustainable Adjustment of Global Imbalances

This paper uses NIESR’s global econometric model, NiGEM, to analyse possible adjustment paths for the US current account, if its current level of 6 per cent of GDP proves unsustainable. Nominal exchange rate shifts have only a transitory impact on current account balances, so any long-term improvement of the US current account balance would require a real and sustained reduction in domestic absorption, or a rise in foreign absorption. This could be effected through a sequence of exchange rate movements driven by a gradual rise in the risk premium on US assets. This would induce a permanent change in the real exchange rate, and would also reduce domestic absorption in the US due to a rise in real interest rates. Global policy coordination, which involved raising domestic demand in countries such as China and Japan, could speed the process of adjustment and ease the negative impact on the US economy.

Unemployment in the European Union: a dynamic reappraisal

This paper examines the movements in EU unemployment from two perspectives: (a) the NRU/NAIRU perspective, in which unemployment movements are attributed largely to changes in the long-run equilibrium unemployment rate and (b) the chain-reaction perspective, in which unemployment movements are viewed as the outcome of the interplay between labor market shocks and prolonged lagged adjustment processes. We present an empirical analysis that distinguishes between unemployment movements arising from long-run equilibrium changes and those arising from lagged intertemporal adjustments. This analysis has far-reaching policy implications. Our analysis shows that the rise in EU unemployment over the 1970s and first part of the 1980s was due largely to permanent shocks (especially the rise in working-age population and the decline in capital formation), whereas the unemployment increase in the first part of the 1990s was due largely to temporary shocks (especially the fall in competitiveness and the rise in real interest rates).

What Moves OECD Real Interest Rates?

This paper conducts a structural time-series analysis of ex-ante real interest rates of the five major OECD economies. The relationships of rates to permanent and temporary real and nominal shocks appear to be qualitatively consistent with predictions of stochastic general equilibrium business cycle models. U.S. real and nominal shocks are found to be the most important causes of persistence in rates, but only nominal shocks cause dynamic movements that are coherent across all countries. The rise in real interest rates in the early 1980s was mainly due to nominal shocks; real shocks played little or no role.

Taylor Rules in the Open Economy

Taylor rules which link short-term interest rates to fluctuations in inflation and output, have been shown to be a good guide (both positively and normatively) to the conduct of monetary policy. As a result they have been used extensively to model policy in the context of both closed and open economy models. A key question that arises when analysing the conduct of such policy rules in the open economy case is whether the relevant measure of inflation is the growth in output prices or consumer prices. In this paper, we show that embedding a rule specified in terms of output price inflation into a benchmark two-country model confirms the existing result that local stability requires that the response of nominal interest rates to excess inflation should be such that real interest rates rise (the Taylor Principle), but this requirement may be partially offset by raising the interest rate response to increases in the output gap. However, all the conventional results do not hold when we replace output price inflation with consumer price inflation. In this case, Taylor rules which satisfy the Taylor principle will not support a unique rational expectations path for prices and other macroeconomic variables in response to specific shocks. Our results suggest that adoption of consumer price based Taylor rules might be chronically destabilising.

Unemployment in the European Union: A Dynamic Reappraisal

This paper examines the movements in EU unemployment from two perspectives: (a) the NRU/NAIRU perspective, in which unemployment movements are attributed largely to changes in the long-run equilibrium unemployment rate and (b) the chain-reaction perspective, in which unemployment movements are viewed as the outcome of the interplay between labor market shocks and prolonged lagged adjustment processes. We present an empirical analysis that distinguishes between unemployment movements arising from longrun equilibrium changes and those arising from lagged intertemporal adjustments. This analysis has far-reaching policy implications. Our analysis shows that the rise in EU unemployment over the 1970s and first part of the 1980s was due largely to permanent shocks (especially the rise in working-age population and the decline in capital formation), whereas the unemployment increase in the first part of the 1990s was due largely to temporary shocks (especially the fall in competitiveness and the rise in real interest rates).

Financial liberalisation and price stability in Kenya

The literature suggests that financial sector liberalisation undertaken during periods of high inflation raises nominal interest rates, leading to even higher inflation. When inflation is lowered, say via monetary restraint, real interest rates rise. In Kenya, however, this sequence of events occurred despite initial price stability. Thus other factors might explain the failure of financial sector reform, including the aid-embargo of 1991, the multiparty election of 1992, and the coffee boom of 1994–1995. A general lack of prudent monetary and fiscal policies made it difficult for the government to address these shocks. Thus, financial liberalisation cannot be blamed for the poor economic outcomes.

The Changing Distribution of Income: Evidence and Explanations

Abstract This article is concerned with the economics of the distribution of income, emphasizing aspects which have been missing from the recent literature. It begins with factor shares and the rise in real interest rates. These are important in their own right and in relation to the determination of wage differentials. The paper questions the conventional wisdom which locates rising inequality and unemployment solely in a shift in demand away from unskilled workers. This explanation is too partial in its approach, is hard to reconcile with the empirical evidence, and ignores labour market institutions and the role of social norms. In seeking to explain the experience of different countries, we need to look not just at wages but also at the capital market, and should not be limited to a simple competitive supply-and-demand story.

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The Economic Consequences of Disappearing Government Debt Vincent Reinhart and Brian Sack Federal budgetary developments in the United States of late have been fast moving and nothing short of outstanding: The latest projections of the Congressional Budget Office (CBO) peg the federal surplus for fiscal year 2000 in excess of $230 billion, around $50 billion more than its forecast of just six months earlier. For a generation accustomed to mounting government obligations and dire warnings of adverse macroeconomic consequences, a surplus in 2000 amounting to 2.4 percent of nominal GDP—the largest since 1948—would seem to imply a changed economic landscape. Yet these developments are not limited to the United States. Several factors have combined to improve fiscal positions in a number of countries worldwide. Among these factors are cyclical recoveries that have boosted income tax revenue, increases in equity values that have produced capital gains tax windfalls, and spending restraint due in part to spending caps and, in many European countries, a desire to satisfy the fiscal criteria in the 1993 Maastricht treaty. In its latest OECD Economic Outlook, the Organization for Economic Cooperation and Development projects that fourteen of twenty-three countries covered will achieve fiscal balance or surplus over the immediate two-year projection period. Indeed, if one excludes Japan, whose fiscal position is moving in the opposite direction, [End Page 163] the aggregate fiscal balance of the Group of Seven large industrial countries (the G-7) will have swung from a deficit of more than 3 percent of their combined GDP in 1996 to a projected surplus of about ¾ percent by 2001. These developments represent a general shrinkage of governments’ claims on the world pool of saving, rather than a shift in the U.S. government’s demands alone. Will these worldwide shifts from deficits to surpluses, and the consequent declines in government debt, have important economic consequences? For some the self-evident answer is no. An influential body of opinion holds that government debt, because it implies a future stream of taxes to meet interest payments, should not be counted as part of household wealth. In that view the decline in government debt, by itself, has no implications for economic activity or financial market prices.1 Instead, any effects that occur stem only from changes in fiscal policies that condition that path of declining debt. Our interpretation of recent events, however, is inconsistent with this view. After reviewing the recent fiscal experience of the industrial countries, we focus on three separate ways in which the disappearance of government debt has economic effects. In our interpretation the U.S. budget surplus and its projected continuation and deepening represent a change in policy comparable in magnitude to the creation of massive deficits in the 1980s. At that time several prominent economists, including Olivier Blanchard, William Branson, Rudiger Dornbusch, and Martin Feldstein, stressed mechanisms through which a policy conventionally viewed as providing current fiscal stimulus could actually have contractionary effects.2 The core of this insight was that fiscal policy in the 1980s was on a path that implied ever-widening deficits, which would require increasing real interest rates over time.3 Investors in capital markets would bring forward to the present their expectations of higher short-term real interest rates, in the form of higher long-term interest rates, lower stock prices, and a stronger foreign exchange value of the dollar, before the direct stimulus of additional spending would be felt. [End Page 164] One channel for this “expectational crowding out” was thought to be the appreciation of the dollar on foreign exchange markets, as the prospect of a rise in real interest rates in the United States relative to those of its trading partners gave investors an incentive to increase their dollar holdings immediately. There is less reason, however, to bring that aspect of the argument to bear on the present situation. To a first approximation, if mounting surpluses are a generalized world phenomenon, rather than specific to the United States, there would seem to be no need for the dollar’s exchange value to adjust to tilt spending into better balance worldwide. However, the other two mechanisms—those operating through changes in...

World public debt and real interest rates

Real interest rates appear to have risen in virtually all industrialized countries in the 1980s and 1990s relative to levels that prevailed in earlier decades. There is concern that this may reflect higher public debt, which is crowding out private-sector activity. There has also been increasing international capital market integration, implying that interest rates in any country may be sensitive to global fiscal developments. This paper estimates the effects of such fiscal developments on real interest rates in nine industrial countries. The results imply that the increase in OECD-wide government debt since the late 1970s was a major factor in the rise in real interest rates. Copyright 1999 by Oxford University Press.

A long view of real rates

In light of the large and sustained rise in real interest rates in the late 1970s and early 1980s, this paper reviews: (i) the theoretical discussion on the determination of nominal and real interest rates; (ii) the factors determining real interest rates; and (iii) problems of defining and measuring the real rate. We go on to examine the historical record of real interest rates in France, Germany, the UK, and the USA since 1875. We find that high real rates since 1980 seem to be a return to a long-run norm, and it is the period from the Second World War to 1979 that represents a more natural period in which to investigate an abrupt change of behaviour for real interest rates. Copyright 1999 by Oxford University Press.

Banking crises vs. depositor crises: the era of the finnish markka, 1865–19981

This paper represents an attempt to elucidate the chains of events that led to banking crises in Finland during the period 1865-1998. The aim is to use Finnish experience to shed light on the causal mechanism of banking crises and the possibilities of affecting the development of crises. In four of the five cases studied, developments during the bank-crisis cycle in the real and financial sectors conformed to the classical boom-bust cycle, as documented in many previous studies of bank crises. The onset of a recession and the subsequent bank crisis was triggered by a fall in export demand and a rise in real interest rates. The third crisis period differed interestingly from the others, and developments during this crisis show how financial regulation and expansionary policies shifted the burden of the recession from banks to depositors. A particularly worrisome finding is, that, as a result of a marked decline in the solidity of firms during the markka era, the risk of financial instability in Finland has increased significantly.

World Public Debt and Real Interest Rates

Real interest rates appear to have risen in virtually all industrialized countries relative to levels that prevailed in the 1960s and 1970s. There is increasing concern that this may reflect higher public debt, which is crowding out private sector activity. Over the last two decades, there has also been increasing international capital market integration. This suggests that interest rates in any country may be sensitive to global fiscal developments. This paper estimates the effects of aggregate fiscal developments in the industrialized world on real interest rates in nine industrial countries. The results imply that the increase in OECD-wide government debt since the late 1970s was a major factor explaining the rise in real interest rates.